A Simple Pair Trade Strategy In Liquid ETFs (Pair Trade Exchange Traded Funds)

Last Updated on June 11, 2021 by Oddmund Groette

Pairs trading is one method of making your strategy less exposed to market fluctuations. Most traders trade stocks, but you can, of course, also trade ETFs. If you are trading ETFs you indirectly have a wide diversification, albeit to different segments of the stock market.

This Sunday morning I was just testing some ideas on these different ETFs: SPY (S&P 500), EEM (emerging markets), EWG (Germany), EWU (UK), and EWJ (Japan). They seek to copy the performance of the most important stock exchanges in the world. I tested the following:

  1. Every day rank each ETF based on the IBS formula: (c-l)/(h-l).
  2. Buy on the close the one with the lowest value, short the one with the highest value.
  3. Exit on the close next day.

In other words, this is a 100% “market neutral” strategy – a daily pair trade. I write “market neutral” because no strategy is ever completely neutral unless you’re doing arbitrage.

Here is the equity curve in %:

The test period is from 1. January 2005 until the present.  No commission and no slippage.

Does anyone trade something similar to this? Obviously, this one is hard to implement because the MOC needs to be sent 15 mins before close. However, for example in Amibroker you can easily program your strategies to send orders just seconds before the close:

 

Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.